Business Intelligence and Industrial Espionage in Outsourcing
October 9, 2009 by Bierce & Kenerson, P.C.
Boeing Loses $1 Billion in Transactions as Punishment, Escapes Debarment
Summary.
“Business intelligence” refers to the practice of collecting and analyzing competitive information in the marketplace to assist an enterprise in self analysis and redirection of its resources to maintain and improve competitiveness. “Industrial espionage” refers to the clandestine methods of obtaining competitive information that is not publicly available. As a legal matter, this distinction can have serious consequences. This case study offers some suggestions for staying on the right side of the law not only in business intelligence but also for internal audit controls and business ethics.
Boeing Punished.
In July 2003, the U.S. Air Force hit Boeing Company with the harshest punishment on any major U.S. military contractor in decades. Boeing was found to have stolen thousands of pages of confidential technical documents of its archrival, Lockheed Martin Corp. Boeing reportedly used such industrial secrets in submitting proposals to the Air Force in 1998 to provide satellite launching services. As a result, the Air Force transferred to Lockheed the services of providing seven launches previously awarded to Boeing, and in addition awarded three more launches to Lockheed.
Boeing Escaped Debarment: “Too Big to Punish”?
Many commentators on the Boeing punishment have asserted that Boeing escaped debarment under the Federal Acquisition Regulations simply because it was too big to punish. The losses by other agencies would have been considerable. Instead, the punishment related to the Boeing business segment that had allegedly violated the law, rather than to all other Boeing divisions. This punishment reflects the difficulty of the Government’s use of the debarment process to protect Government interests when the supplier community is highly concentrated and consolidated.
The Economics of Business Intelligence.
Business intelligence serves a valid competitive purpose in the marketplace. Gathering publicly available information:
- sharpens the competition and increases opportunities for consumer and customer choice;
- enables competitors to restructure their offerings of services and goods, often by restructuring key business processes for improved efficiency, reduced cost, better quality, a more attractive suite of services and goods and a broader appeal to a wider range of customers;
- and improves the efficiency of markets, accelerating improvements in customer service and thereby improving the customer’s quality of life, integration of external services with in house services and other external services.
The Law of Business Intelligence.
The law of business intelligence is limited by common law and statutes that protect proprietary rights, privacy rights and intellectual property.
Debarment under the Federal Acquisition Regulations.
Causes of Debarment.
Debarment can occur based on conviction, violation of law or a serious or compelling cause. Debarment is a remedy available to the U.S. Federal Government under the Federal Acquisition Regulations. The purpose is to exclude “ineligible” contracts from new bidding.
Violations. The debarring official may debar a contractor for a conviction of or civil judgment for:
(1) Commission of fraud or a criminal offense in connection with-
(i) Obtaining;
(ii) Attempting to obtain; or
(iii) Performing a public contract or subcontract.
(2) Violation of Federal or State antitrust statutes relating to the submission of offers;
(3) Commission of embezzlement, theft, forgery, bribery, falsification or destruction of records, making false statements, tax evasion, or receiving stolen property;
(4) Intentionally affixing a label bearing a “Made in America” inscription (or any inscription having the same meaning) to a product sold in or shipped to the United States or its outlying areas, when the product was not made in the United States or its outlying areas (see Section 202 of the Defense Production Act (Public Law 102-558)); or
(5) Commission of any other offense indicating a lack of business integrity or business honesty that seriously and directly affects the present responsibility of a Government contractor or subcontractor.
Nonperformance; Violations of Public Policy.
In addition, a debarring officer my debar a contractor, based upon a preponderance of the evidence, for:
(i) Violation of the terms of a Government contract or subcontract so serious as to justify debarment, such as-
(A) Willful failure to perform in accordance with the terms of one or more contracts; or
(B) A history of failure to perform, or of unsatisfactory performance of, one or more contracts.
(ii) Violations of the Drug-Free Workplace Act of 1988 (Pub. L. 100-690
(iii) Intentionally affixing a label bearing a “Made in America” inscription (or any inscription having the same meaning) to a product sold in or shipped to the United States or its outlying areas, when the product was not made in the United States or its outlying areas (see Section 202 of the Defense Production Act (Public Law 102-558)).
(iv) Commission of an unfair trade practice as defined in 9.403 (see Section 201 of the Defense Production Act (Pub. L. 102-558))
Violation of Immigration Laws.
Additionally, debarment is available as a remedy against a contractor, based on a determination by the Attorney General of the United States, or designee, that the contractor is not in compliance with Immigration and Nationality Act employment provisions (see Executive Order 12989). The Attorney General’s determination is not reviewable in the debarment proceedings.
Lack of Present Responsibility.
Finally, debarment may be imposed against a contractor or subcontractor based on any other cause of so serious or compelling a nature that it affects the present responsibility of the contractor or subcontractor. Such a determination is more subjective than other reasons, and may include abuse of confidential information through industrial espionage or as suggested below, failure to maintain internal accounting records and a history of unethical business conduct.
Consequences of Debarment.
Debarment prevents an entity from being an eligible bidder on new contracts but does not terminate existing contracts. Contractors debarred, suspended or proposed for debarment are also excluded from conducting business with the Government as agents or representatives of other contractors, from acting as subcontractors and from acting as individual sureties. Exceptionally, an agency head or a designee determines that there is a compelling reason for contracting with the debarred supplier. This exception leaves open the choice of sanctions for misconduct, and leaves the affected agencies free to decide to ignore the debarment for their own internal purposes. FAR 9.404.
Non-Procurement Common Rule.
Also, under the “non-procurement common rule,” debarred contractors may be ineligible for nonprocurement transactions such as grants, cooperation agreements, scholarships, fellowships, contracts of assistance, subsidies, insurance and other government benefits.
Existing Contracts Not Abrogated.
Notwithstanding the debarment, suspension, or proposed debarment of a contractor, federal agencies may continue contracts or subcontracts in existence at the time the contractor was debarred, suspended, or proposed for debarment unless the agency head or a designee directs otherwise. In addition, the Governmental agencies may continue to order goods or services under purchase orders against existing contracts, including indefinite delivery contracts, in the absence of a termination. However, agencies may not renew or otherwise extend the duration of current contracts, or consent to subcontracts, with contractors debarred, suspended, or proposed for debarment, unless the agency head or a designee authorized representative states, in writing, the compelling reasons for renewal or extension.
Business Judgment and Evaluation of Factors in the Decision to Debar.
Under the Federal Acquisitions Regulations (Section 9-406(a)), before arriving at any debarment decision, the debarring official should consider a range of business judgment considerations and an assessment of the impact on the government factors. The list includes:
(1) Whether the contractor had effective standards of conduct and internal control systems in place at the time of the activity which constitutes cause for debarment or had adopted such procedures prior to any Government investigation of the activity cited as a cause for debarment.
(2) Whether the contractor brought the activity cited as a cause for debarment to the attention of the appropriate Government agency in a timely manner.
(3) Whether the contractor has fully investigated the circumstances surrounding the cause for debarment and, if so, made the result of the investigation available to the debarring official.
(4) Whether the contractor cooperated fully with Government agencies during the investigation and any court or administrative action.
(5) Whether the contractor has paid or has agreed to pay all criminal, civil, and administrative liability for the improper activity, including any investigative or administrative costs incurred by the Government, and has made or agreed to make full restitution.
(6) Whether the contractor has taken appropriate disciplinary action against the individuals responsible for the activity which constitutes cause for debarment.
(7) Whether the contractor has implemented or agreed to implement remedial measures, including any identified by the Government.
(8) Whether the contractor has instituted or agreed to institute new or revised review and control procedures and ethics training programs.
(9) Whether the contractor has had adequate time to eliminate the circumstances within the contractor’s organization that led to the cause for debarment.
(10) Whether the contractor’s management recognizes and understands the seriousness of the misconduct giving rise to the cause for debarment and has implemented programs to prevent recurrence
Proposed Debarment of MCI WorldCom.
Debarment may also be asserted for lack of adherence to internal controls over accounting and reporting systems and business ethics. This argument was asserted against MCI (formerly WorldCom) on July 31, 2003, subject to administrative determination.
The argument is based on the contractor not being “presently responsible” because in this case, the contractor was alleged to have been previously involved in one of the biggest shareholder frauds in U.S. history and still suffered ten “material weaknesses” in the company’s internal controls. In the case of the General Services Administration’s notification letter to MCI WorldCom assorting the proposed debarment, “A material weakness is a weakness found to be pervasive throughout an encore organization. Each individual weakness is considered to be a significant control deficiency. The acceptable standard is for a company to have no material weaknesses or of one is found for it to be promptly corrected.”
In MCI’s case, the GSA alleged that the company needed to implement “procedures and controls to review, monitor and maintain general ledger accounts. Implementing adequate controls on the general ledger is significant because that is where all of the company’s financial transactions are summarized for all of its accounts.” MCI has promised to comply with Sarbanes-Oxley Act of 2003 by June 30, 2004 one year earlier than the statute requires. MCI noted it is aware of the deficiencies and is cooperating with the GSA and investigating agencies.
What a Customer Should Know about an Outsourcer’s Key Personnel.
Concentration of Sellers in an Industry.
Ordinarily an enterprise customer should not have many concerns about the prior employment history of a major outsourcing services provider. After all, the services provider’s business is to maintain the confidentiality of its customers’ confidential data. Without the customer’s trust that its data will be protected, the customer will not engage in outsourcing. If the outsourcing service provider is engaged in a tightly competitive environment with only a few competitors, the customer could become concerned that its confidential information might float around the industry and become known to multiple outsourcing service providers, particularly those who service the customer’s competitors. Thus, the customer should be concerned about the normal employment and privacy protection polices practices and enforcement methods that the external services provider has adopted.
Employment Practices.
Employment practices are probably the most frequently abused methods of collecting competitive information in an illegal or wrongful manner. Hiring an experienced person from a key competitor has long been a method of gathering competitive information. If the person was in a position of trust and confidence, having had access to key competitive policy, strategy and tactical information, the newly hired employee is in a position to damage his or her former employer’s business. Outsourcing customers may properly inquire about a proposed contractor’s hiring process.